Sell or Rent out?

[Anonymous]

I own my home outright. It’s worth $300-350k. I’d like to upgrade to a home worth $500k. I can get $2,200 in monthly rent for my home, and have to pay $5k annually in taxes. if you were me would you sell the current home to get the forever home? or rent it out?

[Anonymous]

Sell ofcourse.

[Anonymous]

Do you really want to be a landlord? How would you feel about late night calls about blocked toilets etc?

[Anonymous]

Assuming your question is a financial one...

Assume you net $300k on the sale.

You'll receive $26,400 in rent.

You'll owe $5k in taxes. Assume you'll need to pay $3k in expense per year. And assume you'll have 0% vacancy rate.

You'll net about $18k/year on an asset you could net $300k if sold. That's a 6% cash on cash return under ideal circumstances.

Or you can get a 5%+ return by parking the $300k in short term treasuries -- risk free and no hassle of being a landlord.

Or you can get more than that in other marketable investments.

Sell it.

[Anonymous]

Anonymous wrote:Assuming your question is a financial one...

Assume you net $300k on the sale.

You'll receive $26,400 in rent.

You'll owe $5k in taxes. Assume you'll need to pay $3k in expense per year. And assume you'll have 0% vacancy rate.

You'll net about $18k/year on an asset you could net $300k if sold. That's a 6% cash on cash return under ideal circumstances.

Or you can get a 5%+ return by parking the $300k in short term treasuries -- risk free and no hassle of being a landlord.

Or you can get more than that in other marketable investments.

Sell it.

Thank you. I really appreciate you breaking this down for me.

[Anonymous]

Anonymous wrote:Assuming your question is a financial one...

Assume you net $300k on the sale.

You'll receive $26,400 in rent.

You'll owe $5k in taxes. Assume you'll need to pay $3k in expense per year. And assume you'll have 0% vacancy rate.

You'll net about $18k/year on an asset you could net $300k if sold. That's a 6% cash on cash return under ideal circumstances.

Or you can get a 5%+ return by parking the $300k in short term treasuries -- risk free and no hassle of being a landlord.

Or you can get more than that in other marketable investments.

Sell it.

You’re not factoring in any appreciation on the rental. If you’re in an area with rising home prices that could make it more attractive as a rental.

[Anonymous]

Anonymous wrote:Assuming your question is a financial one...

Assume you net $300k on the sale.

You'll receive $26,400 in rent.

You'll owe $5k in taxes. Assume you'll need to pay $3k in expense per year. And assume you'll have 0% vacancy rate.

You'll net about $18k/year on an asset you could net $300k if sold. That's a 6% cash on cash return under ideal circumstances.

Or you can get a 5%+ return by parking the $300k in short term treasuries -- risk free and no hassle of being a landlord.

Or you can get more than that in other marketable investments.

Sell it.

To play devil’s advocate:

SELL:
Are you really getting 5% on $300K ($15K year 1, $16K Y2, etc) if you turn around and use the $300K toward a down payment on a $600K Home? Your new PITI will be at least $3000-$4000/mo

KEEP:
If the house is in a good location, you can count on rent increases over the long term. If you net $18K/yr for Years 1-3, then get to $20K Y4-8, etc. you have a nice steady income stream. Use a property management co if you’re willing to pay the fees.

If you buy a $600K house and put $100K down, your PITI will be in the $4000-$4500 range. Could cash flow from your rental property offset the higher PITI?

[Anonymous]

Anonymous wrote:

Anonymous wrote:Assuming your question is a financial one...

Assume you net $300k on the sale.

You'll receive $26,400 in rent.

You'll owe $5k in taxes. Assume you'll need to pay $3k in expense per year. And assume you'll have 0% vacancy rate.

You'll net about $18k/year on an asset you could net $300k if sold. That's a 6% cash on cash return under ideal circumstances.

Or you can get a 5%+ return by parking the $300k in short term treasuries -- risk free and no hassle of being a landlord.

Or you can get more than that in other marketable investments.

Sell it.

You’re not factoring in any appreciation on the rental. If you’re in an area with rising home prices that could make it more attractive as a rental.

Also not factoring in equity and that you’ll be building equity on top of the rent revenue.

It’s a headache, I wouldn’t do it. Especially in DC… but there’s a reason people do.

[Anonymous]

Because it is fully paid I will keep renting it out and I will use the income to pay for my new house mortgage.

[Anonymous]

We are in a similar position and will be renting our home out. The house has a 2% mortgage and is inside the beltway walking distance from a Metro stop in a highly desirable school pyramid. We are going to hang on to it.

Not thrilled about becoming a landlord, but we have the skills and time to do it.

[Anonymous]

Sell it. $200k in the market will be $900k in 15 year and over 1.5 million in 20. This is conservative investing.
Move is slowly into Roth to let it grow tax free. Use the $150k for down payment on the new home.
You will learn about markets, you don't have to deal with tenants and you won't have two homes to fix.
Get a roommate for the new house if you need help paying for it.

[Anonymous]

FWIW I wish we had sold our condo during the last bubble. We hired a management company to handle rentals and maintenance and stuff, but it takes a big bite out of the profit. Then we had to replace some appliances. Another bite. And the HVAC will need to be replaced soon. And on and on.

We kept it because it "diversifies our portfolio" and stuff like that. It's in (what is now) a decent area in DC, but we need to worry about things changing in the future. There's a fair chance we will turn a profit when we eventually sell it, but will it be more than if we had just dumped the money into an index fund? Maybe, maybe not. But the index fund would have been a LOT less hassle.

[Anonymous]

The only reason people believe in rental property is because they don't have an issue with leverage.

In the above example, if you take out a $240,000 mortgage at 7% and let's say invest that in 5% treasuries, then your calculation looks like this:

Equity: $60,000

Annual rental: $26,400
Treasury Interest: $12,000
Less: ($5,000) taxes
Less: ($24,000) mortgage
Less: ($3,000) other expenses

Net: $6,400 or 10.7% annual return on equity

You are betting the house appreciates while the mortgage of course does not and you are betting on rent increases.

It's just like P/E returns...they only make sense if you are comfortable with debt to juice returns.

I personally think you can't count on 100% occupancy and the hassle of being a landlord is so awful that the return is just not worth it for one property.

[Anonymous]

I agree with the PPs who say it's not worth the hassle. I know there is a lot of advice to buy real estate and use rentals to grow wealth, but it just seems like a PITA to be a landlord.

[Anonymous]

Sell it. $200k in the market will be $900k in 15 year and over 1.5 million in 20. This is conservative investing.
Move is slowly into Roth to let it grow tax free. Use the $150k for down payment on the new home.
You will learn about markets, you don't have to deal with tenants and you won't have two homes to fix.
Get a roommate for the new house if you need help paying for it.

This by itself makes it better for me to be a passive investor. My time is worth something (I can make money doing something I enjoy doing) and paying someone else to do it also reduces profit.